CLSA gung-ho, predicts 9% economic growth

In what could be the most bullish outlook for Indian economy, brokerage house CLSA has revised the growth projections to 9 per cent in the next financial year (2004-05). This is close to the 9-11 per cent growth projections for China.

The gross domestic product (GDP) growth for the current fiscal has also been pegged higher at around 7.5 per cent, according to the revised CLSA estimates.

This growth projection is close to the best performance of India (7.8 per cent reported in 1996-97) and higher than the projections made by the local trade bodies such as CII, Ficci and even the Reserve Bank of India.

According to the research house, a better than average monsoon which will boost to the agricultural sector is partly behind the improvement. "We also detect that a more fundamental change in the economy is now underway," it added. CLSA said the country's economy has consistently surprised on the upside.

It added that foreign capital from non-resident Indians (NRI) and overseas investors is flowing into the country at a rapid rate.

The forex reserves are up $21 billion since the beginning of April after rising by a similar amount in fiscal 2003. This money is now being used by the banking system to generate cyclical investment-led upswing.

The double-digit growth in investment will be supported by an expected 8 per cent rise in private consumption and some additional spending by a government that will go to the polls before the year is out, it said.

It has also made a forecast of 8 per cent growth in economy for fiscal 2006 with internal demand continuing to lead the way. The growth would have been higher but for the expected drag that will come from net exports as strong domestic demand boosts imports and export growth slows in response to the peaking out of the US economic cycle.

CLSA also pointed that the current account's brief return to surplus has come to an end. There will be a current account deficit of just over 1 per cent of GDP in the current fiscal year widening to around 3 per cent of GDP over two years, it said.

Forex reserves will continue to increase and rupee is expected to make further gains against a soft looking dollar, with the exchange rate moving up to 43.50 against the dollar by end-March 2005, according to CLSA.

With growth accelerating, official interest rates are expected to rise in fiscal 2005 by 50 basis points, with a slightly larger increase for the following year.

The concerns on the fiscal side, according to CLSA, have become less pressing under a strong growth scenario. Tax revenues will be buoyant and should help to ensure that the public sector deficit holds steady at around 10 per cent of GDP despite long overdue fiscal reforms and additional public expenditure in the run up to the election.